The chair of the board had just left dinner where Jack had agreed to be the next compensation committee chair. As he finished his key lime pie, he wondered, “Where do I begin?”
All too often individuals take on a committee chair role with no guidance as to what the expectations are. This article focuses on four key criteria to being an effective compensation committee chair—using common sense, staying current, focusing on the long term and knowing your compensation committee checklist.
In 1776, Thomas Paine wrote “Common Sense,” the first call for independence from Great Britain. Over 240 years later, common sense is still an important principle for committee chairs. If you have a question, ask it! Regardless of the responder—a fellow board member, the CEO, a compensation consultant—ask your questions! If something doesn’t seem right, follow your instinct because something is usually out of place. Many board members have a fear of asking questions as they are concerned that they may appear to be unknowledgeable. As the committee chair, your role is to lead the discussion and provide an environment where it is safe to question past practices or a new concept.
As the committee chair, your role should be to ensure that your committee is educated on a consistent basis. Through education sessions during committee meetings, or by attending industry conferences and webinars, how is your committee staying current? If you don’t know what your committee’s education plan is, that is a good sign you may need one! The areas to ensure you and the committee are staying abreast of are regulatory and market trends in both plan design and compensation levels, and best practices in governance.
Focusing on the Long Term
Having a clear focus on the long-term vision of the bank and how compensation supports that vision is extremely important. It is very easy to get caught up in the details of compensation committee meetings and lose focus on the big picture. Simply put, What is your bank’s strategic plan, and how does the plan manifest itself in the bank’s compensation plans? Here is a sign—if all your committee does is focus on market analysis and what the incentive opportunities are, your bank may not have an effective strategic plan. The best committees focus on the goals in the annual and long-term plans and how they motivate performance in a sound fashion relative to overall risk management.
Compensation Committee Checklist
While we provide a compensation committee checklist at the end of this article, these items need to be evaluated in the overall context of the long-term view. What is in the best interest of the bank two to four years from now? If you are wondering what one of the items below is, you should review that item with the committee!
Checklist for All Banks
- What is the bank’s compensation philosophy?
- How is the strategic plan incorporated into performance plans?
- How are the bank’s performance plans compliant with the federal regulatory agencies’ Guidance on Sound Incentive Compensation Policies?
- How is your compensation peer group formed, and when was it last updated?
- What portion of incentives is performance versus time-based?
- Where is the bank challenged to hire or retain talent?
- Do you have a committee calendar with specific processes that occur at each meeting?
- How often do you conduct executive sessions?
- Do you have a compensation committee charter?
- What is the education plan to ensure the committee stays informed?
Checklist for Public Banks
- Have you done a pro-forma CEO pay ratio calculation for fiscal year 2017?
- When do you need to go to shareholders to refresh your qualification under Section 162(m) of the Internal Revenue Code, which limits the tax deduction for annual compensation for eligible employees to $1 million and must be re-approved every five years?
- Have you evaluated the independence criteria of your outside advisors?
- What is the tax strategy if an eligible executive’s compensation exceeds the limit under Section 162(m)?
- How recently was the compensation discussion and analysis section of the proxy critically reviewed?
- What is the three-year history of the bank’s results on say-on-pay votes?
- What is the say-on-pay frequency for the bank?
- Has the committee reviewed the commentary by ISS and Glass Lewis on compensation matters?
- Do you have a published clawback policy?
- When did you last review the compensation committee charter?